“Stocks are strong. The next point that needs to be addressed is that stocks are very extended in the short term and a light-volume pullback would do wonders to restore the health of this rally,” said Adam Sarhan, chief executive of New York-based Sarhan Capital, in a note.

Data points and the Fed

A stream of top-tier economic data, culminating Friday with the release of U.S. nonfarm payrolls and other employment figures for January, is on tap this week. The Federal Reserve concludes its first policy meeting of 2013 on Wednesday. See: Wall Street's 'Super Bowl' set to kick off.

Budget concerns may also be in the mix after Rep. Paul Ryan, chairman of the House Budget Committee and the 2012 Republican vice presidential nominee, said he expects steep automatic cuts in federal spending to take place March 1. Read about Ryan's comments.

QE3

No policy changes are expected from the Fed this week, but investors will be on the lookout for further clues to policy makers’ assessment of the economic recovery. The U.S. central bank last year said it was committed to holding interest rates near zero as long as unemployment remained above 6.5% and inflation remained below 2.5%.

It‘s less clear, however, what it would take to get the Fed to end its open-ended third round of quantitative easing, widely known as QE3, according to Philip Marey, senior U.S. strategist at Rabobank International.

Reuters

Federal Reserve headquarters in Washington (2012 file photo).

Minutes of previous Fed meetings have highlighted a wide divergence of opinion over the potential time frame for the program. The liquidity boost provided by the Fed’s QE program has been credited with helping to lift stocks, commodities and other so-called risk assets in recent years.

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